warren buffett's advice for 2015

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  1. 1. WARREN BUFFETTS ADVICE FOR 2015
  2. 2. The Berkshire Letters Page 02 When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.
  3. 3. The Berkshire Letters Page 03 CONTENTS Page 04 Warren Buffett Becomes 3rd-Richest As Berkshire Hits Record High Page 07 2 Handy Warren Buffett Tips For The Current Rout In Oil Stocks Page 10 Identifying Moats Like Warren Buffett Page 12 Warren Buffett: Europes The Next Great Investment Destination Page 15 Buffett: Invest In Wonderful Businesses At Fair Prices Page 16 Buffetts 3 Biggest Mistakes; Takeaways for Investors Page 19 Buffetts Cashing Out Of Oil For $3.7 Billion Page 21 Buffetts Intentionally Bad Advice?
  4. 4. The Berkshire Letters Page 04 Warren Buffett Becomes 3Rd-Richest As Berkshire Hits Record High The Oracle of Omaha, Warren Buffett had officially became the third richest person in the world on Friday, 5 December 2014 as shares in Berkshire Hathaway hit a record high. Both classes of Berkshire shares (Class A and B) have risen by close to 30 percent since the beginning of this year. Berkshire Acquisition Spree In the second half of 2014, Berkshire Hathaway has been on an acquisition spree. In October, the company announced that it would buy Van Tuyl Group, the largest closely held US automotive dealer for an undisclosed amount. More recently, the company agreed to buy Durecell Batteries from Procter & Gamble for US$4.7 billion. Earlier this year, Berkshire bought a US TV station from Graham Holdings after holding shares in the company for more than 40 years.
  5. 5. The Berkshire Letters Page 05 Source: FactSet. Chart comparing the returns of Berkshire Class B shares (Blue) and the returns of S&P 500 (Green) Aside from pure acquisitions, Berkshire has plans to provide US$3 billion to Burger King Worldwide Inc. as the fast food chain plans to take over Tim Hortons Inc. Berkshire is expected to earn 9 percent annual interest on this financing deal should it go through. A Fortress In an email on Friday, Warren Buffetts biographer, Andrew Kilpatrick said that the all-time closing high stock price today (Friday, 5 December 2014) is due to a widening appreciation of what Berkshire really is, a fortress. No doubt, shareholders appreciation of the companys investment philosophy has widened. A recent case study made by Berkshires US$26.5 billion purchase of railroad BNSF attests to this same philosophy. The investment was made during the height of the Great Recession of 2008/2009. It is now on track to pay itself by the end of this year. The railroad business has been buoyed by an onshore oil boom as it paid more than US$15 billion in dividends to Berkshire as at 30 September 2014.
  6. 6. The Berkshire Letters Page 06 Expansion In Singapore Separately, Berkshires business insurance unit has received a license to sell insurance in Singapore. This is part of the companys push into the Asian insurance space. The company has been hiring higher-level executives from AIG and others to help it expand in the commercial insurance space in Asia. Warren Buffett was quoted as saying that Berkshire intends to build a very, very significant commercial insurance operation over time. That operation will operate with better underwriting results than competitors. According to a statement from Berkshire Hathaway Specialty Insurance, the unit will offer commercial property, casualty, financial lines, marine, energy and construction coverage in Singapore. The business unit intends to distinguish itself from other insurance providers with higher coverage limits as well as the backing of one of the strongest balance sheets in the world. If a business does well, the stock eventually follows.
  7. 7. The Berkshire Letters Page 07 The oil and gas industry has been rife with uncertainty in the last six months with oil prices looking like this: Handy Warren Buffett Tips For The Current Rout In Oil Stocks It is in these episodes of uncertainty that the timeless principles of investing maestro Warren Buffett might stand out. A couple of his tips in particular could come in handy as the impact of falling oil prices has been felt within the shores of Singapore. Share prices of companies such as jack-up rig provider Ezion, and rig builders Keppel Corporation Limited and SembCorp Marine Ltd, have fallen in excess of 27 percent since the start of 2014. Source: Nasdaq
  8. 8. The Berkshire Letters Page 08 With that in mind, here are a couple of Buffetts tips to note, starting with: Buffett first penned the words so if you wait for the robins, spring will be over during the depths of the Great Financial Crisis of 2008-09. Much like the crisis before, the deep uncertainty in oil prices now would likely test the courage of investors who are interested in oil and gas stocks. Some investors may be tempted to wait and see. Others may be waiting for oil prices to stabilize. But remember Buffetts words: If uncertainty is the one thing that is holding you back from studying oil and gas companies well, maybe it shouldnt be. Instead of waiting for the cloud of uncertainty to clear on the oil and gas sector, this might be the right moment to actually start sifting through the rubble of fallen share prices in search of a bargain priced company. As always, we might want to start with the strongest oil and gas companies around, and work our way from there. But HOLD ON there, partner! Before you dip your toes into the uncertain waters, keep another Buffett quote in mind: Never test the depth of the water with both feet The cloud of uncertainty around oil prices alone is not enough reason to go all-in into oil and gas companies. As Buffett quips, jumping into unknown waters with both feet could leave you, the private investor, sinking deeper into uncertain waters. That is especially true if we are new to the industry and may not know the ins and outs of the business of oil and gas. History has shown that oil prices can remain low for long periods of time, therefore deciding on a strict allocation of your own cash for oil and gas stocks may be the more prudent move.
  9. 9. The Berkshire Letters Page 09 Furthermore, as my colleague Stanley wrote, it is much more important to pick good companies with prudent management teams than it is to bet on the direction of oil prices alone. The bottom line is, pick good companies first. Foolish take away With uncertainty, often comes opportunity. The overlying investing theme would be for the Foolish investor to recognize uncertain scenarios, and act with discipline in deploying funds. If we can do that, we might find ourselves owning winning companies at bargain prices. Do you have another Warren Buffett quote which you think is apt for the current rout in oil stocks and oil prices? Sound off below, and Fool on! Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
  10. 10. The Berkshire Letters Page 10 The legend behind value investing is well-known for identifying great companies from mediocre ones. This, is done through the identification of moats when you analyse companies. A moat is essentially something that endorses a value standpoint of a company that is so strong, that you dont have to worry about it not being able to generate economic returns for the forseeable future. This something is also essentially a deterrence from competitors to copy, emulate and unintentionally creates a barrier to competiton from other companies. There are basically a heavy fistful of moats that we look at day in day out at Shares Investment whenever stocks are discussed in the office, pantries, and even over drinks. Lets kick this moat-tion (pun intended) off with the first one that we see around us, but not able to touch physically. The Power Of Brands As A Moat A brand is a powerful intangible asset if it creates the effect of continued recognition, in the form of repeat customers, and even warrant a certain range of pricing for the companys products. It is even more powerful, if its weaved into a habitual behaviour. A classic example would be Coca Cola, where the merits of the product creates consumer loyalty. Coca Cola essentially makes you more thirsty than before you drank it. However, it is the ability of it to couple a brand association to a certain image and perceived value of its brand, and create lasting repeat customer purchases. Coca Cola easily competes with more than a dozen cheaper, generic equivalents out there in the market, but still manages to charge 20 30 percent more than such brands. Identifying Moats Like Warren Buffett
  11. 11. The Berkshire Letters Page 11 Why is that? Thats because consumers identify with the value that they associate Coca Cola with, and continues to purchase their favourite brand. When A Brand Does Not Add Value; No Moat To Talk About Just to be clear, a brand, by itself, does not confer competitive advantages of any sort. Brands only create a value if they increase the willingness of a customer to pay for that particular product. Essentially, Brands only add value and can be seen as a moat if it stems the willingness of consumers to pay for a brand in the habit of using the product, have an emotional connection (perceived association) to it, or believes that it confers a certain level of social status. SI Takeaway It is quite easy to identify a brand. The tougher part is when you are looking at a company with this trait, youve got to ask yourself the question if it warrants a real classification of a moat, like what was discussed above.
  12. 12. The Berkshire Letters Page 12 Following billionaire investor Warren Buffetts exclusive interview with Fox Business News, the 84-year-old philanthropist acquired a controlling stake in Detlev Louis Motorrad-Vertriebs (DLMV) for a little more than 400 million Euros (US$456 million). The